The sheep industry has exhibited anything but normal price trends over the past five years and this year is no exception. Increase volatility and “abnormal” seasonality will continue to challenge planning and risk management. Lamb markets rebounded strongly from last summer, but during the first quarter prices lost steam in the feeder, slaughter and wholesale markets – and retail feature prices have been relatively flat for over a year.

A slowdown in the lamb price recovery is cause for concern because, according to seasonal price indexes, slaughter lamb prices at auction and on a carcass-based formula historically trend upward through the first and second quarters before weakening around July. The fact that substitute proteins hit record highs in the first quarter is also grounds for concern.

Since last summer, steer and heifer price have been charging upwards – similar to the lamb market, until this March, when steer and heifer gained another 3 percent and the slaughter lamb market weakened. This was unexpected for higher beef prices were thought to push lamb prices higher.

“We’ve seen strong prices before but nothing this extreme,” said Dennis Smith, a commodities broker for Archer Financial Services in Chicago. “This is really new territory,” (The Los Angeles Times, 4/8/14). The retail value of “all-fresh” USDA choice-grade beef jumped to a record $5.28 per pound in February, up from $4.91 the same time a year ago.

Higher beef prices are primarily due to lower cattle supplies. Over the past few years, high feed prices due to the drought reduced profitability among cattle sectors and prompted increased liquidation. Lower beef supplies means less beef per capita – or per person – available and a tendency for higher prices. This doesn’t mean lower beef demand. In fact, beef demand has expanded each year since 2009 which also helps explain higher prices at retail.

So why did lamb prices weaken?

Industry experts hypothesize that, like the U.S. wool industry, the domestic lamb market might be influenced more by Australian lamb prices than domestic influences. Australian lamb prices gained steadily since November, but really took off in late January only to fall about 10 percent in March, before rebounding sharply again in early April.

Australian prices were unusually high for its late summer, when supplies were ample and can be explained by higher export demand. Exports to the Middle East and the U.S. were strong, but in February, two of the highest-priced outlets for red meat – the European Union and Canada – also imported more lamb.

Did the boost in Australian export demand mean higher U.S. prices?

A complicating factor is that Australian lamb imports to the U.S. were up 16 percent in the first quarter year-on-year. By contrast, lamb slaughter and production was down an estimated 1 percent and 4 percent, respectively. Did increased lamb imports mean lower lamb prices in March? In sum, we might have to look beyond our boundaries to understand domestic price trends.

Feeder Lamb Market Mixed

In March, the feeder lamb market in direct-trade slowed while gaining 1 percent at auction. Feeder lamb prices moderated in March after sharp gains in January and February, but were still 60 to 70 percent higher than a year ago. It is unknown, but some feeder sales at auction might also be channeled into the nontraditional market as well as the commercial market yet direct sales are likely going strictly into commercial feedlots.

Sixty- to 90-pound. feeder lambs at auction saw a 1 percent gain in March to $207 per cwt., and up 60 percent from a year ago. Prices at San Angelo averaged $216.67 per cwt., up 4 percent monthly, Ft. Collins saw a 2 percent rise to $240 per cwt. and Sioux Falls dropped 4 percent to $227.06 per cwt.

Feeder lamb prices in direct trade averaged $185.86 per cwt. in March, down 8 percent monthly yet up 70 percent year-on-year. Prices fell from an average $202 per cwt. in February – the highest level since October 2011.

The U.S. Department of Agriculture, Agricultural Marketing Service (USDA/AMS) reported, “Concerns about how the slaughter lamb market will react after Easter are beginning to surface. Lamb feeders are beginning to pull their reins in,” (USDA/AMS, 3/14/14). “Moderate temperature in Colorado coupled with favorable ship weights out of the Imperial is fermenting growing concerns about slaughter lamb weights in Colorado. Some of the Imperials are gaining more than three quarters of a pound a day. If the industry does not stay on top of them they will have a big risk of having overweight lambs in June and July,” (3/21/14).

Slaughter Lamb Prices

Slaughter lamb prices at auction averaged $157.06 per cwt. in March, down 5 percent monthly and 47 percent higher year-on-year. Prices in San Angelo fell 8 percent to $154.88 per cwt., prices in South Dakota fell 1 percent to $156.63 per cwt. and at Kalona, Iowa prices gained 1 percent to $158 per cwt.

Formula trades on a carcass basis in direct sales averaged $303.86 per cwt. in March, up 0.6 percent monthly and up 34 percent from a year ago. On a live-equivalent basis, March’s average was $150.78 per cwt., down 0.1 percent due to a lower dressing percentage.

Slaughter lamb prices continued to rebound in March yet the rate of gain slowed. First-quarter formula prices were 33 percent higher than a year ago yet still about 7 percent lower than the first quarter of 2011 and 2012.

Live, direct negotiated sales averaged $160.61 per cwt. in March, down 0.4 percent monthly and up 36 percent from a year ago.

Formula prices do not reflect pelt and offal credits given, if any. However, negotiated prices do include possible pelt and offal credits.

Lamb producers can estimate the live price of slaughter lambs that packers could pay. Start with the wholesale price and compute the dressed value by multiplying by an estimated 50 percent. That is, the dressed weight is an estimated 50 percent of the live weight. Now add the pelt value (on a per cwt. basis) then subtract the processing and packaging cost.

If pelt prices or other byproduct values weaken, then packers are more likely to offer lower slaughter lamb prices. In March pelt prices fell by an average 8 percent monthly and were 24 percent lower than a year ago. Fall Clips averaged $9.56 per piece, No. 1s were $7.94 per piece and Californian pelts were $11.38 per piece.

Feeder and Slaughter Lamb Forecast s

The Livestock Market Information Center (LMIC) estimated in early April that national direct slaughter lamb prices on a carcass-basis could range from $320 to $325 per cwt. in the second quarter, 43 percent higher year-on-year. Sixty- to 90-pound feeder lamb prices could range from $225 to $235 per cwt., up 101 percent year-on-year.

Higher prices through June are very possible if lamb quality is maintained, beef prices stay high (very likely) and the import situation is favorable. We don’t know yet how imports directly affect the U.S. market, but the industry is working on finding out.

Wholesale Prices Softened

The gross carcass value (wholesale composite) was $372.54 per cwt. in March, 1 percent higher monthly and 28 percent higher than a year ago.

Wholesale averages gained sharply from last summer through December then continued to strengthen, but at a slower rate through March.

The leg, trotter-off, led the March increase with a 4 percent jump monthly to $384.53 per cwt. for the leg.

The shoulder, square-cut, was the only other primal to gain in March, to $300.94 per cwt., up 2 percent monthly. The rack and loin were both lower.

The 8-rib rack, medium, fell 1 percent to $820.90 per cwt. and the loins, trimmed 4 x 4, also weakened by 1 percent to $477.51 per cwt.

In March, ground lamb averaged $533.52 per cwt., down 3 percent monthly and down 1 percent from a year ago.

Last summer and through the fall, packer price spreads were squeezed: the value of slaughter lambs was rising and the meat market was flat. In January, price spreads made a quick turnaround and began to increase again. It is theorized that the method of lamb procurement by packers can have an effect on price.

Packer-owned lambs jumped to an average 20 percent of weekly slaughter in the first quarter of 2014 compared to 12 percent in 2012 and 2013 and 18 percent in 2011. Twenty-one percent of weekly slaughter in March was packer-owned.

Packers typically want to own livestock to ensure that they have a steady supply of lambs to maintain unit costs at slaughter. If the slaughter chain slows, costs per head or per lb. rise and margins are squeezed. If we see packer-owned slaughter increase, it might be because there are insufficient lambs ready for market elsewhere, the packer-owned supply must go to market before getting too big and/or to preserve margins.

In the first quarter formula purchases were lower than the last two year’s average and live, negotiated purchases were up. This means that lambs from feedlots are still moving, but in reduced numbers. Purchases from auctions were also down.

Typically, slaughter lamb prices on formula are higher than on a live basis either at auction or in the direct, negotiated trade. However, in March, demand for formula lambs had been reduced, perhaps lowering its relative price.

Lamb at Retail and Food Service

This year it is expected that food prices will rise from 2.5 to 3.5 percent with the historical inflationary trend, but beef and veal at home could increase from 3 to 4 percent in 2014 compared to 2 percent last year. “Other meat” (lamb) could increase from 2 to 3 percent this year compared to a drop of 0.1 percent in 2013 and a 1.7 percent increase in 2012.

Thus far, our limited retail price data doesn’t show a real push-through of higher lamb costs to retail. Some cuts including the rack, rib chops, boneless leg, butterfly boneless leg, shank, ground lamb and breast were mostly flat over the past year, but with some lift in March. Higher lamb prices should not be an issue to the industry if consumers perceive the value is there.

Lamb retail feature activity in March declined with Lent and St. Patrick’s Day, but then bounced around with no discernable trend, up and then down. The shoulder and loin chop continued to receive the most ad attention and overall, lamb prices in features held firm through the month (USDA/AMS, 3/2014).

With higher meat prices, reduced meat availability and health concerns, many American are eating less meat. However, “16 percent of those Americans who say they are consuming less red meat are eating less but higher quality red meat,” according to Patty Johnson, global food analyst at the consumer research firm Mintel (1/22/14). Johnson added, “The red meat category is facing a difficult future, as both health trends and price are working to discourage consumer demand for red meat products. The industry also has done little to innovate since the recession and therefore has offered consumers little to get excited about. This presents an opportunity for the industry to try to invigorate the market with new products, improved quality and improved functionality,” concludes Patty Johnson.

This would be a good time to offer lamb consumers more value-added products such as lamb burgers or ready-made gyro meat or other boneless products.

Does Value-Added Pricing Matter?

In recent studies – the National Research Council (2008) and the Hale Group “Roadmap” (2104) – value-based pricing is reported as a means to improve lamb quality and consistency of quality. And yet the industry has not only not seen wide-spread adoption raises the cost of gain for these lambs to the industry by placing them in feedlots versus pasture. However, the real economic losses to the California sheep industry likely lays in the impact on its ewes.

A veteran sheep herder Martin Etchamendy commented: “Lack of water is slowly turning the natural pastures his sheep once fed on into dirt, jeopardizing his ewes for next year,” (The Weather Network, 2/7/2014). “If we don’t have adequate feed. The reproduction system could be hurt for the following year,” said Etchamendy.

At the end of February, alfalfa ranged from $235 to $280 per ton in southern and southeast California, depending upon quality, compared to the national average of $188 per ton.

In February Imperial Valley old crops also began shipping in February. These are lambs that were born during the first-half of last year across the West and were sent to the California Imperial Valley last fall to slow growth on alfalfa fields. These lambs ship to Colorado feedlots from 120 to 140 pounds. and are placed on feed for several weeks before market.

This unique production structure of slowing growth allows the U.S. lamb industry to provide fresh lamb through the year.

The old crop Imperial lambs will likely be ready for Easter while the new crop California feeders will go to market during the summer and fall. This also means that, depending upon the time of year, some of our product is around 1 year old and some around 6 to 9 months.

In March, old crop Imperial lambs will continue shipping; however, and depending upon the recent rains in California, the shipment of new crop Imperial lambs might slow and continue during more normal shipping times of April through June.

Slaughter Lambs Hit $1.60

Live, auction slaughter lambs averaged $164.93 per cwt. in February, up one-half percent monthly and 48 percent higher year-on-year. The average live, auction value was 30 percent higher than its 5-year average for the month.

Live, negotiated slaughter lambs traded at $161.20 per cwt. in February, up 3 percent monthly and up 37 percent year-on-year. Weights were up 6 percent monthly to 155.50 pounds, down 1 percent from a year ago.

Slaughter lamb prices on a carcass-based formula averaged $301.99 per cwt. ($150.91 per cwt. on a live-equivalent basis) in February, up 3 percent from January and 33 percent higher year-on-year. Slaughter weights slipped 3 percent in February to 77.53 pounds and were down 3 percent from a year ago.

Slaughter lambs on formula are about $10 per cwt. lower than live prices. Most of the formula-priced lambs are those that are under supply contracts with feeders, so it is possible that the lower price might mean that there are insufficient feedlot lambs for market, forcing packers into higher-priced markets. Packers might be bidding up slaughter lamb prices at auction and in the negotiated trade to secure supplies. Perhaps insufficient feedlots supplies also can account for the higher percentage of weekly slaughter that is packer-owned.

In February, the portion of weekly slaughter that was packer-owned jumped to 22 percent, up from 17 percent in January and 10 percent a year ago. This is the second highest percentage after June 2011’s 28 percent. Packers likely utilize their own supplies to secure supplies in a short market, but also when slaughter lamb prices are on the rise.

Further slaughter lamb price gains might be constrained by a slowdown in wholesale price advances, but also by a weaker pelt market. USDA/AMS explained that pelt priced weakened toward the end of February as the quality of pelts was lower because the seasonal unshorn are more undesirable,” (2/21/14). At $10.69 per piece, the longer length Fall Clips were 3 percent lower monthly and down 18 percent from a year ago. No. 1 pelts averaged $9.06 per piece, were down 3 percent in February and were down 17 percent from a year ago.

Rack Holds above $8, and Climbing

The weighted-average lamb wholesale cutout value was $368.59 per cwt. in February, up 1 percent monthly and 28 percent higher year-on-year. The cutout gained 31 percent since its 2013 low last August. The February net carcass value – after deducting a $33.75 per cwt. processing and packaging cost – was $334.78 per cwt.

A turning point occurred last September when lamb primals switched into higher gear, and posted week-on-week price gains not seen in the sluggish meat market for some time. Primals gained 8 to 30 percent in the six months to February 2014, with the exception of the rack. The rack took off with a 60 percent gain over six months.

The cutout was supported by a higher rack and shoulder. In February the rack, 8-rib, medium, gained 3 percent to $828.85 per cwt., up 64 percent from a year ago. The rack, roast-ready, special averaged $1,528.75 per cwt. in February, 2 percent higher monthly and up 26 percent from a year ago.

much product already on hand? Does this of value-based pricing, but a decline in value-based pricing.

Lamb pricing methods are most often divided into two categories: live-weight and carcass pricing methods. According to USDA Packers & Stockyards Programs (P&SA), in live-weight purchasing of livestock, the price is quoted and the final payment is determined based on the weight of the live animal. Transactions that use some variation of live-weight purchasing are usually on an “as-is” basis with a single price per pound for all animals in the entire transaction.

In a “carcass-based” purchase, the price is quoted and the final payment is determined based on each animal’s hot weight, which is the weight of the carcass after it has been slaughtered.

Carcass-based purchase methods often involve schedules of premiums or discounts based on animal quality, yield and other features, such as time of delivery and number of animals in the transaction.

P&SA reported a growing number of livestock transactions include price adjustments for quality characteristics that are not covered by USDA grades, such as percent of lean meat in the carcass and depth of the loin.

The price before premiums or discounts is referred to as the “target” or “base” price. Carcass-based pricing typically rewards sellers with livestock that meet or exceed the target standard. Livestock carcasses graded below the target result in the seller receiving discounts.

PS&A reported that the proportion of annual lamb slaughter that was purchased on a carcass-based method fell from 60 percent in 2002 to 41 percent in 2011 (March 2013). This compares to about 60 percent and 76 percent in the cattle and hog industries, respectively.

A simple analysis revealed that since August 2001 when formula prices were released, the correlation between formula purchases and the percent of lambs yield grading 1, 4 and 5 was -0.48, or negatively correlated with formula purchases.

This means that since 2001 if formula purchases increased, the percent of inferior lambs (yield grades 1, 4, and 5) fell. Said differently, the percentage of live, cash purchases at auction had a correlation factor of 0.45 with less desirable yield grades (1, 4 and 5). Live, per lb. purchases were positively correlated with inferior-quality lambs. These conclusions are not statistically significant and warrant further research.

An overriding concern with respect to value-added pricing is that although in theory it seems like progress toward giving consumers what they want and rewarding producers with quality lambs, pricing by value doesn’t appear to be rewarded at retail. If lamb cuts of different quality were priced differently at retail then perhaps we would see more premiums and steeper discounts offered for slaughter lambs.

That is, does a packer receive more per pound at retail for a yield grade 2 versus a yield grade 4 lamb? Rather than real or perceived quality variation at retail, the value difference between yield grade 2 versus 4 likely reflects processing cost differences – trimming cost and loss. By contrast, USDA Choice or Prime lamb is presumed to have value to consumers.

Another concern regarding delivering consistently high quality lamb to consumers is that the percentage of federally-inspected carcasses that are graded has been declining over time from over 80 percent in the early 2000s to the low 60s in 2013.

As others have pointed out, increased use of value-based pricing should go hand in hand with electronic grading to improve grading accuracy and enable packers to sort carcasses on quality prior to fabrication.

A related concerned with promoting value-added pricing is that its base price may reflect such a small segment of the market such that it doesn’t necessarily reflect prices representative of the entire market.

If the reference price is a price in a typically thin market, in which trading volumes are low, then it may be susceptible to misinterpretation by market participants and it may not necessarily reflect overall demand and supply conditions.

For example, if the reference price is a national carcass price then it may not represent overall market conditions.

The percentage of national slaughter that moved through carcass trade that did not go directly into a box for case-ready sale, fell from over 20 percent in 2009 to 15 percent in 2013.

Another concern is that the carcass market represents yield grades 1 through 4 – from the too thin to the too fat – and weights of the carcass trade might be higher than that of average slaughter lambs and thus reflect lower prices.

Using the lamb cutout (composite of wholesale cuts) might be a better representation of the lamb meat market instead of the small segment that is now the carcass trade. It warrants industry discussion.

Start of Shearing Season Met With Mixed Market

From mid-March through early April, wool shearing was under way in southern California, across much of the West and Midwest. Wool that was reported on a clean basis averaged about 3 percent lower than last spring with a range from 1 percent to 12 percent lower depending upon region and micron.

Most U.S. wools trade on a greasy basis, yet wool prices are reported on a greasy and clean basis. Wool is traded on a clean basis internationally and the wool trade calls this wool “clean wool fibers present” (CWFP). The percentage (yield) of clean wool leftover after being scoured is the clean wool volume. In the U.S. yield can range from 40 to 70 percent (National Academy of Science, 2008) and is influence by fleece density, staple length and management practices.

Mike Corn, manager of Roswell Wool, reported that the “Bakersfield” southern Californian wools that traded in early April had higher yields than expected, had very low vegetable matter problems, were well prepared and traded closer to comparable Australian wool prices than in the past.

The U.S. Department of Agriculture Agricultural Marketing Service (USDA/AMS) reports that U.S. wools typically trade at about 75 to 85 percent of Australian wools. Differences in fleece density, but also wool preparation are important reasons why U.S. wools typically bring less than Australian wools.

Most Australian wools are table skirted which means the wool is thrown onto a table for visual inspection and all inferior wool is removed (bellies, manure tags, urine-stained wool, vegetable matter and shorter or offgrade parts).

By contrast, many U.S. wools will have bellies out, but that might be the extent of wool preparation.

“Producers who do minimal preparation of their wool before sale are losing substantial premiums paid for wool that has been more prepared for sale,” (National Research Council, 2008).

USDA/AMS reports that classed and skirted wools usually trade at a 10 to 20 cents per pound clean premium to original bag prices (in which bellies, stained and other inferior wool is not separated).

During the first week of April close to 800,000 pounds of wool sold. In the Fleece States prices ranged from $3.96 per pound clean for 20 micron to $2.81 per pound clean for 25 micron.

In the Territory States prices ranged from $4.05 per pound clean for 21 micron to $2.35 per pound clean for 27 micron.

Clean wool prices reflect trades FOB warehouse in original bag or square pack, bellies out, some graded and 76 mm and longer. Prices don’t include other possible grower expenses such as coring, freight or handling fees at the warehouse.

On a greasy basis in the Fleece States, ewe wool brought $1.21 per pound greasy for 21 micron (tender) and yearling wool brought $1.67 per pound greasy for 20 micron and $1.51 per pound greasy for 21 micron. Lamb wools (50-65 mm) received $1.65 per pound greasy for 21 micron to $1.42 per poundgreasy for 23 micron.

The Australian Department of Agriculture, Fisheries and Forestry (ABARES) predicted a mixed outlook for wool, with prices higher in the short-term to around 1,160 Australian cents per kg for 2014- 15 compared to a March average of 1,046 Australian cents per kg, (March, 2014).

ABARED added that the EMI should remain at around 1,155 cents per kilogram in 2015-16. Large offerings have kept a lid on further price rises.

Looking further out, as Australian sheep inventory rebuilds in the next four years and wool production gains, ABARES expects wool prices to weaken (WoolNews. net, 4/2014).

Reports suggest that trading throughout China’s wool textile industry has been sluggish, with demand from both the domestic retail market and the export trade lower than expectations.

Data from the China Chamber of Commerce for Import and Export of Textile and Apparel (CCCT) indicate that exports of wool fabric during the first two months of the year were 9 percent lower than January/ February 2013 (WTiN, 4/7/2014).

A disappointing winter wool retail season might have some repercussions in growing wool stockpiles and a cap on raw wool prices in coming months.

That said, so much depends upon the Chinese market.

China will continue to be the world’s largest raw wool imported, but also increasingly a major wool consumer.

Australian Wool Innovation’s Allan Wang said that Chinese consumers held a very positive view of wool, in part due to its environmental credentials (ABARES, 4/4/2014).

Wang said that these figures held powerful long-term implications for Australian wool, with China’s clothing expenditure expected to surpass that of the United States in 2019.

ASI

ASI keeps sheep industry members updated on ASI activities and industry news by regularly distributing and updating various information pieces and sources.